Wednesday, August 7, 2013

Fantasy Football Trades & Behavioral Economics

It's August and the fantasy football season is upon us. There are draft sheets to be built, preseason games to be watched, FFG podcasts to listen to, and research to be done. It's a great time of year, and a reminder that, yes, life is good. I look forward to draft day more than I do my birthday or Christmas. Who needs gifts when you have beer & a room full of friends ready to ruthlessly insult every draft mistake?

Today's post is on one of the oddities of fantasy football: trades, and why there are so few of them.
If you do not play fantasy football, here is a primer. A group of ten or twelve people form a league, each pays an entry fee, and everyone drafts (or picks) from the list of all NFL players at each offensive position (quarterback, runningback, receiver, etc.) to make a team for each participant. Each guy selects a group of "starters" from his team each week, and those players' statistics in that week's real NFL games each result in a certain number of points for that player. The fantasy teams go head to head and the team with the most cumulative points wins that week. Wins and losses are tallied, the league culminates in a single elimination playoff, with the winner getting most of the entry fees, and some money paying out to second & third place.

One aspect of fantasy football is the ability to trade players between teams. It's a free market with only slight governance: usually a commissioner who will prevent unfair trades. He's like the SEC of the fantasy football marketplace. As teams almost always have an incentive to improve the weak spots of their teams, trades, in theory, should happen all the time. Yet even with twelve different teams, you often can count the total number of trades, for an entire season, on one hand.

The Trade Scenario
Let's create a trade scenario to illustrate what might be working against an executed trade. We have two teams, it is the beginning of week four, and both teams have suffered three losses to start the season at 0-3. Both teams are strong at one position, weak at another, and have an immediate need to improve their starting lineups. For simplicity we'll only look at the positions being traded: wide receiver (WR) and runningback (RB), and each team can only start two of each. In this scenario, Team 1 is strong at runningback and weak at receiver; Team 2 is strong at receiver and weaker at runningback. Assume that each player has relatively good depth at each position, and would not be hamstrung by the trade. Also assume that each player's production in the first three weeks is completely in line with their draft position.

The trade would clearly benefit both teams, as the ADP of each team's two starting RBs & two starting WRs would improve. Team 1's starters' ADP would move from 28 to 23.75. Team 2's starters' ADP would move from 29.25 to 23.5. The trade is about as fair as can be expected: the two players are as close together in average draft position as possible. And as each team needs a win desperately, it would make logical sense to accept the trade, as it's more advantageous at this point to have better starters at multiple positions than to have strong depth at a single position.

However, even though the trade would be mutually beneficial, there are a number of factors that work against the trade being accepted by the parties.

The Endowment Effect
This is a behavioral economics concept that describes how once an item is owned, the owner places a higher value upon it. A famous example of Endowment Effect involved giving mugs to a group of participants in an experiment, and then offering them the chance to sell or to trade the mug for an equally priced item (a pen). Once given the mugs and the participants "owned" them, the price at which they valued the mug doubled. Before the experiment they might spend $5 on the mug; but after they owned the mug they wouldn't sell it for less than $10.

So, people value things more once they own them. Each fantasy football owner therefore likely overvalues all the players he currently has on his team, simply by possessing them. This is the reason so many owners love their teams right after drafting them. But what drives this psychological quirk?

Loss Aversion and Reference Points
There are a couple concepts that factor into how we understand the Endowment Effect. The first is a reference point. When you are offered a trade, the reference point is what you are comparing the offer to: it's the alternative. The reference point is often your current position or the status quo. In this scenario, let's assume the reference point for each team is:

Team 1: A team strong at runningback and weak at receiver
Team 2: A team strong at receiver and weak at runningback

Loss aversion is the idea that we feel losses more sharply than we do gains, relative to a reference point. We see this sort of aversion all the time. Losing a game feels worse than winning feels good, so to speak. Losing $10,000 in investments leaves a bigger & more lasting impression than gaining $10,000. Mike McDermott can barely recall how he built his bankroll in Rounders, but he can't stop thinking about he lost it. Let's Make a Deal contestants are unlikely to switch choices, even when the odds for staying put suck, for fear of losing what they might already have behind curtain number one.

How does loss aversion relate to this trade? Even though AJ Green and Matt Forte are of equal value, for all intents and purposes, each owner will feel the loss of their current player more acutely than they will the gain of the new (and needed) player, with the reference point being their current team. Even though the acquired player would be of more benefit to the team, the aversion to losing a player they already own weighs more heavily than the gain of a player who better helps the team. As always, we are not so smart.

Summary and Application
This is a personal finance blog, so I probably should put some thought into how all this applies to our financial lives.

First, it's helpful in any financial transaction to recognize that the seller is likely to overvalue the item, and the buyer is likely to overvalue the money he or she would give up. Each party is probably subject to loss aversion. By recognizing the likelihood that biases are in play, you are in a better position to overcome them.

If you are selling items you own, it is a good practice to ask others what it is worth prior to advertising the sale. Recognize that their assessment is probably less biased than your own.

Do not let the endowment effect lead you to the unnecessary hoarding of stuff, like owning way too many vehicles. Some of the things you own and like are, unfortunately, worthless junk. You are likely unaware of this, and might be better off simply purging things from your life regardless of what you feel for them. You can always buy more crap later, if you miss it.

haha, same here. Fantasy football is even less my thing than real football. I didn't even know when the superbowl was last year until one of the guys started wearing his baltimore cap in the office for a week. =)

But behavioral economics and the endowment effect are my thing, so I kindof caught up at the end. Done By 40 - have you ever read Dan Ariely? I recommend him to everyone. He's a behavioral economist who has done some cool experiments with how we treat money once it's been placed in our hands or how we value objects (even crappy ones) that we make ourselves. He's written a bunch of books, and they all seem to have the word "irrational" in the title. The first might be Predictably Irrational?

I never knew how fantasy football worked before reading this post. I always wondered...........I like the financial analogies. The last few points you made are right on and are something I don't think about to much. When I am selling something the item is worth more to me than the buyer. I need to start asking for outside opinions!

Hi Alexa,I'm the same way. We just sold our 1996 Jeep with a salvage title for only $800 and it was so flipping hard to part with it for so little. It was definitely worth much more to us, as the owners. While KBB doesn't give estimates for salvaged title vehicles, it helped to see that a Jeep in fair condition was only worth a few hundred more...

Love fantasy football! Although I don't get the same draft-day excitement, as in my main league with all my college buddies we're spread out across the country. We also have keepers, which makes draft day slightly less exciting. And it's funny, I was actually just talking to my Dad yesterday about why there are never trades (we started a family league last year). We basically hit all of these same points. In my main league, I think there's only one person I've ever successfully executed a trade with, though I'm pretty sure we've done it each of the past few years. I'm also pretty sure that I've lost the trade each time. Oh well.

That's another aspect I hadn't thought of: if a trade leaves a bad taste in your mouth, that negative feeling is likely to stick with you a lot longer than the excitement of winning a trade.

My very first league is like yours, too. I have to skype in and people are in different states now, but we've been playing for so long that it's still worth it, just as a means to keep in touch with the guys. It's been well over a decade now. When I first joined, we were still tabulating the scores by hand, only got points for TDs and kicks...simpler times.

In some ways, if you enjoy watching football, you may be better off just not playing fantasy football. It kind of changes the way you watch games, and not always for the better...

You end up caring more about a single player getting yardage or scoring a TD than just sitting back and enjoying a good game. During games, I try not to think about fantasy, and just check in on scores later.

Man I love the Fantasy Football analogy. I need to start prepping for draft day. I don't think I've ever made a trade. Whenever someone proposes a trade, I always think it is lopsided and I counter with a trade that the other side thinks is lopsided. Good points on behavioral economics, I find it very interesting.

I have the same pattern with trades. I actually will feel insulted by most trades I see.

I'm behind on prepping, too. Check out the podcasts for the Fantasy Football Guys I linked to...they are, in my opinion, the only guys who really get the math behind FFL. Their "Magic Formula" theory is a game changer.

I don't really know anything about Fantasy Football besides the posts I see on FB, but I do agree about sellers overvaluing items (i.e., when I try to sell stuff on Ebay and realize no one wants my used stuff for what I thought it was worth. ;)). Go Chargers (or Seahawks... or Giants)!!!

Reminds me of an interesting trade I took part in a few years back. I had offered a fair trade and one of the players was a running back. He countered and wanted a different running back that was on my bench. The odd part was the fact that the running back he was interested in was injured and would be out for most of the fantasy season. I wasn't going to argue with him though, if he wanted a lame horse, he could have it. Our commish let it through and to this day we still give him a hard time over the fact that he requested an injured running back.

Yeah, that's another factor that might discourage trades. Loss aversion sticks with the player who made a bad trade...he'll forever think of that bad trade, and is even more unlikely to trade in the future as a result.

This is one of my favorite post I've seen in a while. Again, I'm a bit partial due to the fact I'm currently studying Behavioral Economics and just completed my fantasy draft. I think you put into words the interesting proposition why everyone always feels trades are lopsided on both sides. Even though I understand the concept, I still get attached to the players I draft. I have noticed that in fantasy baseball you see a lot more trades but I think that has to do with the greater statistical nature of the sport and the longevity of the season (players tend to play toward their average). Also, with 20 players on a roster there is less loss aversion (for me) than with only a few (FF).

Another small aspect of this is buying used things that were subsidized like cell phones. People strangely undervalue used smartphones (opposite true with HDTVs) often because they paid under market for them.

Liked the article came across it a little late I guess...I think the biggest problem is that there is not enough wiggle room to make up value in trades...I always give more in trades BC I scour the waivers...I think if the teams were significantly deeper it would make things a bit easier..but then would make it too much effort for the average league...Nice write up and good luck this year!

Liked the article came across it a little late I guess...I think the biggest problem is that there is not enough wiggle room to make up value in trades...I always give more in trades BC I scour the waivers...I think if the teams were significantly deeper it would make things a bit easier..but then would make it too much effort for the average league...Nice write up and good luck this year!

Disclaimer: This blog is written for entertainment purposes only: not to give advice. I'm just some dude on the internet, and one without a whole lot of credentials. It's a good idea to consult with professional before making investment, tax, or financial decisions.